Part 2-Practice Test Questions

Question 1

The typical bank loan fund has debt instruments with an average maturity of ___.

Answer 1

5.3 years or 5 years according to p. 16 of textbook

Question 2

What is a SWP?

Answer 2

a Systematic Withdrawal Plan

Question 3

What are the tax consequences of a SWP?

Answer 3

shares sold after 1 year of ownership qualify for Long Term Capital Gains (LTCG) taxes

Question 4

True or False:
Any gift made to a custodial account is revocable as long as the child is still a minor.

Answer 4

False https://www.investopedia.com/terms/c/custodialaccount.asp#:~:text=Gifts%20to%20a%20custodial%20account,when%20they%20come%20of%20age.

Question 5

According to a table in the CFS readings, if a client withdraws 6% of his/her nest egg each year, and the portfolio earns 5% per year, the portfolio will have a zero balance after ___ years.

Answer 5

32 years I ALREADY screenshotted and complained about this question to IBF

Question 6

Form 1099-B is associated with ___.

Answer 6

the sale of fund shares

Question 7

Can an individual or couple carry a capital loss BACKWARD?

Answer 7

No, only forward

Question 8

CEF shares are listed on ___.
They can also be traded in the ___.

Answer 8

securities exchanges.
over the counter (OTC) market

Question 9

When allocating an older client’s portfolio, think of their Social Security payments as a/an ___.

Answer 9

fixed-rate annuity

Question 10

When analyzing an investment, what variable is very likely to be the most predictable?

Answer 10

Fund fees … I think. Could not find this in the textbook, but online I found this: https://www.morningstar.co.uk/uk/news/149421/how-fund-fees-are-the-best-predictor-of-returns.aspx#:~:text=If%20you’ve%20been%20following,when%20they%20run%20the%20data.

Question 11

The SEC requires fund prospectuses to show ___

Answer 11

before- and after-tax returns P. 193

Question 12

Crosby bought some stock 360 days before his death. Uma bought some stock 3 days before her death. Victor bought some stock exactly 1 year before his death. The heir to Crosby, Uma, and Victor want to know if any of these inheritances qualify for possible long-term capital gains treatment if shares are sold 1 day after death (of Crosby, Uma, and/or Victor).

Answer 12

all 3 holding periods qualify for long-term capital gains treatment BECAUSE inherited property is automatically treated as “long term” for capital gains purposes. P. 201

Question 13

The maximum tax bracket for earned income is ___.

Answer 13

taxpayer’s marginal bracket

Question 14

There are ___ different types of investment companies.

Answer 14

4- ETFs, Open end funds, closed-end funds, and UITs P. 79

Question 15

True or False:
If a mutual fund shareholder opts to have automatic reinvestment of dividends, such a feature will reduce his/her income taxes (vs. taking the dividends in cash).

Answer 15

False https://www.investopedia.com/ask/answers/011215/if-i-reinvest-my-dividends-are-they-still-taxable.asp

Question 16

From 1940 through 2019, the worst U.S. GDP cumulative loss during a recession was ___.

Answer 16

-13.4% or -11.6% according to Washington Post https://www.washingtonpost.com/business/2021/01/28/gdp-2020-economy-recession/

Question 17

___ of risk in a 60/40 stock/bond portfolio is in the stock portion.

Answer 17

90% P.144

Question 18

With a long-short fund, what is the worst case situation?

Answer 18

long positions drop in value and the short positions increase in value. P.21 implies this

Question 19

On an annual basis, U.S. stocks appreciate ___ of the time.

Answer 19

75% of the time P.152

Question 20

Which sentences are True/False-
Equity REIT dividends qualify for the same tax rate as most U.S. stock dividends. Mortgage REIT dividends qualify for the same tax rate as most U.S. stock dividends.

Answer 20

Both sentences are false P.126

Question 21

An ETN is similar to a/an ___ issued by a corporation.

Answer 21

IOU P. 96

Question 22

Bear markets occur about once every ___ years.

Answer 22

4-6 years post WWII.
P. 20

Question 23

The financial services industry uses a ___ annual (real return) as an industry standard for annual withdrawals during retirement.

Answer 23

4-5% P. 179

Question 24

EBITA (Earnings Before Interest, Taxes & Amortization) is sometimes referred to as ___.

Answer 24

cash flow
BUT EBITA and cash flow differ in the following ways -https://www.investopedia.com/ask/answers/012015/what-difference-between-cash-flow-and-ebidta.asp

Question 25

EBITA is not used as commonly as EBITDA, which adds __ to the calculation.

Answer 25

depreciation

Question 26

With a bank loan fund, yields are adjusted ___

Answer 26

adjusted quarterly P. 15

Question 27

The SIPC does not provide protection for certain assets, including: _

Answer 27

(1) commodity futures contracts, (2) limited partnerships, and/or (3) fixed-rate annuities. P.69

Question 28

___ variation in returns reduces long-term annualized returns.

Answer 28

Greater .... I think P.145 may imply it and this Investopedia article seems to hint at it too. https://www.investopedia.com/terms/v/volatility.asp#:~:text=of%20options%20prices.-,Understanding%20Volatility,and%20tends%20to%20be%20steadier.&text=While%20variance%20captures%20the%20dispersion,as%20the%20annualized%20standard%20deviation.

Question 29

Investors who have sufficient assets for the remainder of their lives have no ___ risk.

Answer 29

actuarial P.133

Question 30

___ risk is associated with developing countries.

Answer 30

Economic

Question 31

What asset category is most associated with bankers’ acceptances?

Answer 31

money markets P.41

Question 32

The acronym SWP is associated with ___.

Answer 32

mutual funds seems to be the answer the prompt wants (see P. 61-62) (but there are many other vehicles not mentioned in the question options but are still mentioned on P. 62 from what I can gather from this article: https://www.investopedia.com/terms/s/systematicwithdrawalplan.asp

Question 33

About 90% of day-to-day ETF trading is done by ___ with ___ of outstanding shares owned by individuals.

Answer 33

institutions; 85% P. 88

Question 34

Depending on the state of residency, how are accounts set up for minor children?

Answer 34

UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) P. 54

Question 35

What is a disadvantage of a c/p account?

Answer 35

either spouse can leave his/her share to anyone P.54

Question 36

The phrase glide through is most closely associated with ___ funds.

Answer 36

target date P. 7

Question 37

Focused funds with a low turnover tend to also have ___.

Answer 37

low volatility P. 10

Question 38

Which of the following is a feature of using a SWP? - small cost to set up and low annual costs -tax inefficiency -locked in -complete flexibility

Answer 38

complete flexibility P.61

Question 39

What asset category is closely associated with the phrase shadow pricing? Shadow pricing is the ____. There is a ___ delay in disclosure.

Answer 39

money market funds actual market value of fund money market fund holdings as opposed to the $1 NAV investors pay for shares. Shadow prices were murky until 2011 when SEC required 2X per year disclosure. 2 month

Question 40

ETNs are ___.

Answer 40

prepaid forward futures contracts P. 96

Question 41

In the U.S., CEFs first began trading in ___.

Answer 41

1893

Question 42

Is there a strong correlation between inflation and the value of real estate?

Answer 42

No? Yes & it's moderate? P. 109 I'm asking IBF for clarification on this one.

Question 43

Describe the typical money market fund.

Answer 43

short-term IOUs P. 35

Question 44

Ben and Cathy set up a joint tenants with rights of survivorship account. Ben invests $20,000 and Cathy invests $10,000. What is the ownership?

Answer 44

½ Ben and ½ Cathy

Question 45

Ryan and Catherine set up a Tenants in Common account. Ryan invests $20,000 and Catherine invests $10,000. What is the ownership?

Answer 45

2/3 Ryan and 1/3 Catherine

Question 46

The last time U.S. inflation was negative for a calendar year was ___.

Answer 46

1954 P. 18

Question 47

True or False: Banks can pay whatever rate they wish on their money market fund accounts. Principal in a money market fund never decreases; only yields fluctuate.

Answer 47

Both are true P. 37

Question 48

___ is the only vehicle allowing its creator to control the estate "from beyond the grave."

Answer 48

A trust P.55

Question 49

Public REITs own ___ of all industrial real estate.

Answer 49

1% P.112

Question 50

In general, compared to government bond funds, a high-yield bond fund has ___ maturity.

Answer 50

a higher coupon rate and several years less P. 15

Question 51

In the ideal portfolio whose objective is risk reduction, the investor should seek asset categories that have ___.

Answer 51

a low or negative correlation coefficient I think P. 242 hits this home This article is consistent with this: https://www.investopedia.com/terms/n/negative-correlation.asp#:~:text=A%20diversified%20portfolio%20often%20aims,offset%20by%20gains%20in%20another.

Question 52

T-bills are subject to these risks: ___.

Answer 52

(1) opportunity, (2) purchasing power, (3) reinvestment, and/or (4) taxation. P.132

Question 53

The relationship between expected return and expected risk (using efficient portfolios and mean return) is known as ___.

Answer 53

Capital Asset Pricing Model (CAPM) P.132

Question 54

Commercial paper has original-issue maturities ranging from ___.

Answer 54

30-270 days P.41

Question 55

True or False: A mutual fund with a very high turnover rate can be very tax efficient.

Answer 55

True P.205

Question 56

With sector funds, you can select from ___ representing ___.

Answer 56

several hundred funds / over 45 industry segments. P. 11ish

Question 57

Tenants in common accounts are___

Answer 57

much less popular than JTWROS. P. 54

Question 58

On an annual basis, U.S. stocks appreciate ___ of the time.

Answer 58

70-80%

Question 59

Lou and Maude have a c/p account and 3 adult children. What happens to the account if either Lou or Maude die?

Answer 59

the account receives a 100% step-up in basis P.54

Question 60

An ETF is a type of ___.

Answer 60

investment company P.88

Question 61

As of 2019, institutions owned ___ of all equity REITs.

Answer 61

85% P. 109

Question 62

Market risk is also known as ___.

Answer 62

systematic risk P. 137

Question 63

The 10 largest individual ETFs account for ___ of all ETF assets.

Answer 63

40% P. 88

Question 64

By far, the most popular type of money market fund is ___.

Answer 64

general purpose P. 38

Question 65

The bid/ask spread of the world’s most popular ETF (symbol SPY) is ___ per share.

Answer 65

.01% per share P. 94

Question 66

What is the maximum amount of a money market fund’s portfolio that can be in what is called second-tier paper?

Answer 66

5% P.43

Question 67

According to SEC guidelines, a mutual fund's total assets invested in illiquid securities or thinly-traded securities is ___ or less.

Answer 67

15% https://www.sec.gov/about/divisions-offices/division-investment-management/fund-disclosure-glance/accounting-disclosure/valuation-portfolio-securities-other-assets-held-registered-investment-companies-select#:~:text=Addresses%20factors%20that%20funds%20consider%20in%20determining,securities%20is%20ten%20percent%20of%20fund%20assets.

Question 68

Describe the return of a long-short fund over the past 10 years.

Answer 68

About 5.1% (p. 21) very similar to the returns of long term government bonds (currently around 4.7% as of 11/18) https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

Question 69

Market setbacks of 10% are referred to as ___.

Answer 69

corrections https://www.investopedia.com/terms/c/correction.asp

Question 70

The maximum amount of SIPC coverage for cash is ___.

Answer 70

$250,000 P. 69

Question 71

The biggest problem with target date funds is ___.

Answer 71

allocations among different fund groups are all over the board. P. 7

Question 72

Why do small cap stocks have a wide spread between their simple return and compounded (annualized) return?

Answer 72

high SD P. 223

Question 73

Describe gifts made to a minor’s account.

Answer 73

irrevocable. P.55

Question 74

The 3 essential determinants of real estate risk are ___.

Answer 74

leverage, diversification, and quality of management P. 107

Question 75

When money market shares are redeemed, there is no ___

Answer 75

(1) cost, (2) fee, and/or (3) penalty. p. 36

Question 76

R-squared for the S&P 500 is 100; for utilities it is ___.

Answer 76

43% p. 14

Question 77

A SWP is most closely associated with ___.

Answer 77

income P. 61

Question 78

Another name for target retirement funds is ___ funds.

Answer 78

life-cycle P.6

Question 79

When selling fund shares, the IRS recognizes ___ methods to determine cost basis.

Answer 79

3 P. 194

Question 80

One requirement of a c/p account is ___.

Answer 80

marriage P. 54

Question 81

The average maturity for junk bond funds is ___.

Answer 81

several years less than typical government or investment-grade bond funds. P. 15

Question 82

Back-to-back negative annual returns for equity REITs ___.

Answer 82

are rare P. 125

Question 83

True or false: Uncertainty is the measurable possibility of losing or not gaining in value. Uncertainty is differentiated from risk, which is not measurable.

Answer 83

False- Risk instead of uncertainty False-Risk is differentiated from uncertainty P.132

Question 84

Sector funds can make a nice alternative to investing in ___.

Answer 84

a few stocks P. 11

Question 85

Another aspect of selling short is ___.

Answer 85

you are paying an interest charge

Question 86

Your client is withdrawing 7% of her portfolio's value each year. This same portfolio averages a 3% total return every year. How long until the portfolio has a zero balance?

Answer 86

18 years P. 178

Question 87

What is the weakest, least reliable of MPT's 3 components: 1) asset class returns 2) Asset category risk levels (SD) 3) asset class correlation coefficients ?

Answer 87

asset class returns P. 220

Question 88

If a client takes out 5% of his/her account balance and the portfolio also averages 5% total return each year, the portfolio will have a zero balance after ___ years.

Answer 88

62 years P. 178

Question 89

As of 2019, there were ___ U.S. corporations with a AAA rating.

Answer 89

2 https://www.thewallstreetinsider.com/trends/why-only-two-companies-are-left-with-the-aaa-rating#:~:text=AAA%20bonds%20are%20considered%20the,of%20getting%20such%20a%20rating.

Question 90

Reinvestment risk is greatest for ___

Answer 90

high-yielding long-term bonds. P.140

Question 91

True or False: ETF shares can be traded using stop orders. ETFs can be traded using limit orders.

Answer 91

Both are true. P. 93

Question 92

Return correlation between equity REITs and long- and medium-term government bonds from 1972-2018 was ___.

Answer 92

zero. P. 108

Question 93

Up until 2020, a U.S. stock market drop of 5% or more occurred roughly ___ times a year.

Answer 93

3 P.156

Question 94

During most periods, U.S. stocks have greatly outperformed ___.

Answer 94

inflation. P. 20